Welsh tax forecasts and the Autumn Statement 2014

16 December 2014

Article by Richard Bettley, National Assembly for Wales Research Service

Autumn Statement 2014

The UK Government currently provides most of the Welsh Government’s funding through an annual sum, also known as the ‘block grant’. The annual changes to this £15 billion block grant are decided at the UK Government’s Budget (usually in March) and may be amended in the Autumn Statement.

The Autumn Statement 2014 on 3 December 2014 announced that in 2015-16 Wales will receive additional funding of £113.2 million to be spent in year, and an additional £8.8 million for spending on capital (i.e. longer term projects). The Welsh Government has announced that £70 million of the additional spending will be used in the Welsh NHS.

Devolution of Welsh taxes

Wales will receive control of certain taxes for the first time from 2018 under powers in the Wales Bill. The principles for devolving these taxes have been set by the UK Government. Welsh Government has estimated the amounts that were collected for these taxes in Wales in 2013-14:

  • Stamp Duty Land Tax – £145 million
  • Landfill Tax – £50 million
  • Aggregates Levy – £23 million. This will be devolved subject to a current legal challenge.
  • Welsh Rate of Income Tax (WRIT) – £1,900 million. Income tax is not being devolved and it will remain largely a UK Government responsibility. However, the main UK rates of income tax in Wales will be reduced by 10p, and the National Assembly will be able to decide on a new rate. This would be devolved after 2018, subject to a referendum.

The current Welsh block grant will need to be adjusted from 2018 as the above devolved taxes will be collected by the Welsh Government rather than the UK Government. Although the UK Government has outlined how these adjustments will be made, they are currently still in discussions with Welsh Government on the details. The methodology of these block grant adjustments are important as they will represent a permanent reduction to Welsh funding.

In addition to the devolved taxes, an estimated £960 million of Non Domestic Rates (NDR) collected in Wales are currently received by HM Treasury. The Welsh Government’s block grant includes an element to reflect this. From 1 April 2015 Welsh Government will directly receive any NDR, and the block grant will be adjusted accordingly. The Autumn Statement notes that an agreement has been reached on this adjustment, although details have not yet been published.

Welsh tax forecasts 

The first forecasts of future Welsh taxes have been published alongside the Autumn Statement 2014. The Office for Budget Responsibility (OBR) already produces independent forecasts of the UK Government’s tax and spending plans at the March Budget and Autumn Statement. They are also now responsible for forecasting the levels of Welsh devolved taxes. These OBR forecasts will be used in the lead up to 2018 to indicate the amount by which the Welsh block grant would be adjusted for the subsequent year. When the taxes are devolved in 2018 the forecasts will be used to adjust the block grant for the following years.

Methodology

The OBR forecasts UK taxes based on their understanding of how the UK economy operates. Their forecasts of Welsh taxes use a different methodology as there is limited data on the Welsh economy. The OBR states that they generally assume that the current Welsh share of the various UK taxes will continue to move in line with the amount of tax collected across the UK. They will adapt this methodology should Welsh Government introduce changes to the devolved taxes, or when new data becomes available. The forecasts should therefore become more useful and relevant over time.

Trends in the Welsh tax forecasts

Source: Office for Budget Responsibility, Economic and Fiscal Outlook - Devolved taxes forecast December 2014

Source: Office for Budget Responsibility, Economic and Fiscal Outlook – Devolved taxes forecast December 2014

Methodology

  • The OBR note that lower earnings growth and employment levels in Wales have led to a downward trend in the Welsh share of UK income tax since 2002-03. Recent changes in UK income tax policy have also had different impacts in Wales relative to the UK. UK tax raising policies have generally impacted high earners, however Wales has higher proportions of lower earners. The OBR therefore expects that the share of income tax collected in Wales will not rise in future years.
  • The Welsh share of Stamp Duty Land Tax has been declining since 2007-08 which reflects the relative strength of London property prices. OBR assume that house price rises will be more evenly distributed in future years.
  • The Autumn Statement also changed the Stamp Duty Land Tax rates in a way that means cheaper houses will generally pay less, or nil Stamp Duty. OBR estimate that this will have a disproportionately large impact on the amount of Stamp Duty collected in Wales. This is because Welsh house prices are lower than the rest of the UK. The overall effect is that OBR estimate that the Welsh share of UK Stamp Duty will be lower from 2015-16 onwards.
  • As the Welsh share of UK landfill and aggregates tonnage have remained fairly constant over time they expect landfill tax and aggregates levy in Wales to remain fairly constant in future years.